S T R A T E G I E S

F O R W E A LT H

M A N A G E M E N T

Financial Planning for High Net Worth Individuals

S T R A T E G I E S

F O R W E A L T H

M A N A G E M E N T

C O N T E N T SACHIEVING YOUR FINANCIAL GOALS 2

DEVELOPING YOUR ESTATE PLAN 5

GIVING TO CHARITY 12

MAKING THE MOST OF RETIREMENT ACCOUNTS 14

DETERMINING YOUR INSURANCE NEEDS 18

REFINING YOUR INVESTMENT STRATEGY 22

PROTECTING YOUR ASSETS 27

REDUCING INCOME TAXES 28

PERSONAL WEALTH MANAGEMENT WORKSHEET 32

This publication is distributed with the understanding that the author, publisher and distributor are not renderinglegal, accounting or other professional advice or opinions on specific facts or matters and accordingly, assumeno liability whatsoever in connection with its use. ©2002 4/02 1

ACHIEVING YOURFINANCIAL GOALS

ongratulations! You have success-

fully handled the challenges of

running a business or managing

a career, choosing investments, and building

your wealth to a commendable level. Your

challenge now, however, is perhaps even

greater: astutely managing the assets you

have accumulated to fully achieve your

financial goals.

This challenge has become more

complicated under the Economic Growth

and Tax Relief Reconciliation Act of 2001

(EGTRRA). The highlight of the act is

a sweeping overhaul of estate tax law

beginning in 2002. Other provisions will

affect your income tax and retirement

planning. But to fully benefit, you need to

take the right steps — at the right time.

This booklet provides insight into both

the general concepts of personal wealth

management as well as the impact of the

tax law changes on various management

strategies. We hope it encourages you to

craft and implement a masterful wealth

management plan. We also hope it helps you

realize that successful wealth management

calls for professional guidance, especially to

take advantage of the new tax laws.

Please review the ideas presented in this

booklet, then give us a call to discuss your

situation. Our professionals can lead you

to strategies that best suit your needs.

BUILD A FRAMEWORK

You may feel financially strong but

disorganized. What you need is a realistic

framework so you can better seize financial

opportunities as they arise. To develop this

framework for your financial decisions,

follow the four D’s:

1. Determine where you are today,

2. Decide where you want to be in

the future,

3. Develop a plan to move toward

your goals, and

4. Dive in to make it happen.

This process is ongoing; you must monitor

the plan and adjust it as necessary to ensure

that you are moving in the right direction.

It is a simple concept — yet many who

lay the groundwork for a plan fall short

when it comes to implementing it. Don’t

be one of them.

2

c

MEASURE YOUR NET WORTH

Before you can create a wealth plan,

you need to take a snapshot of where

you are today financially. Net worth

is measured as the excess of all your

assets over all your liabilities. In

other words:

What You Own – What You Owe =

Net Worth

Traditionally, assets and liabilities

are shown on a net worth statement

in order of liquidity — that is,

according to how soon they are

available or due. For example, cash

in your checking account is available

on demand, while equity in your real

estate requires you to sell the prop-

erty to gain access to its worth. So

cash is listed before the real estate.

Liabilities are viewed in a similar

way. The balance due on your credit

cards should be paid before your

home mortgage, so credit card debt

is listed before the mortgage.

The worksheet in Chart 1 will help

you determine your net worth.

SET YOUR GOALS

Now that you know what you have,

you must decide what you want from

the wealth planning process. Would you like

a comprehensive view of your financial

future? This entails reviewing and analyzing

all aspects of your finances (such as estate

planning, insurance, investments and

retirement) and creating a detailed,

comprehensive plan for each area.

Or are you interested only in suggestions on

specific financial issues? For example, if you

3

NET WORTH

A. Cash and cash equivalents $ ____________(checking accounts, money market accounts, CDs, etc.)

B. Marketable investments $ ____________(stocks, bonds, mutual funds, etc.)

C. Other investment and business assets $ ____________(partnership interests, closely held businesses, cash value of life insurance, etc.)

D. Retirement assets $ ____________(IRAs, 401(k)s, Keoghs, SEPs, etc.)

E. Personal assets $ ____________(residences, autos, furnishings, jewelry, artwork, etc.)

Total assets (A+B+C+D+E) $ ____________

F. Personal debt $ ____________(credit cards, personal loans, 401(k) loans, alimony, taxes, etc.)

G. Investment debt $ ____________(margin loans, real estate investment loans, etc.)

H. Personal mortgage debt $ ____________(mortgages, home equity loans)

Total liabilities (F+G+H) $ ____________

Net worth (total assets less total liabilities) $ ____________

WORKING ASSETS

Total working assets* (A+B+C+D above) $ ____________

Investment debt (G above) $ ____________

Net working assets (working assets less investment debt) $ ____________

* Working assets are those assets that have the potential to grow and/or generateincome. They are assets, other than your residence, that will provide financial independence for you in the future. The closer you are to financial independence,the greater the percentage of your total assets should be your working assets.

Chart 1

Net Worth Worksheet

have just sold a

business, you may

need direction on how

to invest the proceeds.

Or you may want to

calculate the required

minimum distributions

from your retirement

accounts. Even if your

immediate focus is on

only one issue, be sure

to understand how it

affects other aspects

of your wealth picture.

Next you need to set

desirable and realistic

goals. This means

balancing financially prudent strategies with

emotionally acceptable thresholds. What

looks good on paper may not always feel

right in your heart. Try to meet these objec-

tives by setting short- and long-term goals

and prioritizing them within each category.

Common goals include the following:

• To accumulate a sizable estate to passon to your heirs,

• To increase the assets going to yourheirs by using various estate planningtechniques,

• To tie in charitable desires with yourown family goals,

• To accumulate enough assets to buy abusiness, a vacation home, etc.,

• To be able to retire comfortably,

• To have sufficient funds and insurancecoverage in the event of serious illnessor loss,

• To develop an investment program thatmay provide a hedge against marketfluctuations and inflation, and

• To minimize income taxes.

When developing a plan, keep in mind

the need for flexibility. Your personal and

financial situation often changes with the

major and minor life events you experience.

Births, deaths, illnesses and marriages can

affect your goals profoundly. Once you’ve

set your goals, you can move toward the

future. The rest of this booklet will discuss

the key areas of any wealth plan and

possible strategies for achieving your goals.

4

DEVELOPING YOUR ESTATE PLAN

y ou may be surprised to discover how

large your estate tax obligation turns

out to be. The estate tax relief under

EGTRRA may not eliminate your estate

tax liability. The act is subject to a sunset

provision, which means the estate tax will

be back in 2011 after its repeal in 2010 if

no further legislation is passed. But in the

meantime, the act has dramatically changed

how you can reduce your gift and estate tax

obligations. With careful gifting and planning,

you can maximize the amount of wealth

you can transfer to your heirs. Consider your

options today to ensure your assets are

managed and passed on the way you intend.

UNDERSTAND TRANSFER TAX

RATES AND EXEMPTIONS

Here’s a simplified way to compute your

estate tax exposure. Take the value of your

estate, net of any debts. Remember that this

includes everything you own individually,

including the face value of any insurance

on your life. It also includes a percentage

of the assets held jointly with your spouse

(generally 50%) and others (the percentage

depending on various factors).

Subtract any assets that will pass to

charity on your death — such transfers

are deductions for your estate. Then if

you are married and your spouse is a U.S.

citizen, subtract any assets you will pass

to him or her. Those assets qualify for the

marital deduction and avoid estate taxes

until the surviving spouse dies. The net

number represents your taxable estate.

During your life or at death, you can pass

up to the exemption amount free of gift and

estate taxes. This amount will increase until

the estate tax is eliminated in 2010. (See

Chart 2 on page 6.) But note that the gift

tax exemption does not increase beyond

$1 million, and even in 2010, the gift tax is

not repealed — so lifetime gifts of more

than $1 million will be subject to tax.

5

Note that the gift tax exemption

does not increase beyond $1 million,

and even in 2010, the gift tax is not repealed.

6

If your taxable estate is equal to or less than

the exemption and you haven’t already used

any of the exemption on lifetime gifts, no

federal estate tax will be due when you die.

But if your estate exceeds

this amount, it will be

subject to estate tax. (See

Chart 3 for 2001 and 2002

marginal rates.) The top

rate will gradually decrease

through 2007. (See Chart 2.)

USE THE UNLIMITED

MARITAL DEDUCTION

Your estate generally can deduct the value

of all assets that pass in a qualified manner

from you to your spouse during your

lifetime or at your death, provided your

spouse is a U.S. citizen. The assets may pass

either outright or in trust. For transfers to

noncitizen spouses, an annual exclusion

applies to gifts of present interests.

Don’t assume the easy way out is the best

way out. You could pass all of your assets to

your surviving spouse tax-free using your

marital deduction, but if your combined

estates are greater than the exemption

amount, your heirs could suffer the

Gift Tax Estate1 and GST Highest Estate, GST Estate Tax Estate Tax Year Exemption Tax Exemption And Gift Tax Rates On $2.5 Million On $5 Million

2001 $675,000 $675,0002 55%5 $805,250 $2,170,250

2002 $1 million $1 million3 50% $680,000 $1,930,000

2003 $1 million $1 million4 49% $680,000 $1,905,000

2004 $1 million $1.5 million 48% $465,000 $1,665,000

2005 $1 million $1.5 million 47% $460,000 $1,635,000

2006 $1 million $2 million 46% $230,000 $1,380,000

2007 $1 million $2 million 45% $225,000 $1,350,000

2008 $1 million $2 million 45% $225,000 $1,350,000

2009 $1 million $3.5 million 45% $0 $675,000

2010 $1 million (repealed) 35% (gift tax only) $0 $0

2011 $1 million $1 million4 55%5 $680,000 $2,045,0001 Less any gift tax exemption already used.2 The GST tax exemption is $1.06 million.3 The GST tax exemption is $1.1 million.4 The GST tax exemption is adjusted for inflation.5 The benefits of the graduated estate and gift tax rates and exemptions are phased out for estates/gifts over $10 million.

* Source: U.S. Internal Revenue Code

Chart 2*Transfer Tax Exemptions, Highest Rates and Potential Liability Under EGTRRA

The estate tax will be back in 2011

after its repeal in 2010

if no further legislation is passed.

consequences. That’s because when your

spouse dies, the assets will be included in

his or her estate for tax purposes.

MAKE LIFETIME GIFTS

TO REDUCE ESTATE TAXES

Gifts you make during your lifetime are sub-

ject to federal gift tax. But you can exclude

gifts of up to $11,000 (up from $10,000 in

2001) per recipient each year. This amount

is indexed for inflation,

and only in increments

of $1,000 so likely will

not increase again for

a few more years. This

exclusion increases

to $22,000 per recipient

if your spouse joins

in the gift. Thus, if one

spouse actually gifts

$22,000 to someone,

both spouses can

elect to split the gift

and treat it as if they

each gave $11,000.

You can make gifts

to as many people

as you like.

To take advantage of the

annual exclusion, the law

requires the donor to give a

present interest in the property

to the recipient. This usually

means the recipient must have

complete access to the funds.

But a parent or grandparent

might find the prospect of

giving complete control of $11,000 a year

to the average 15-year-old a little unsettling.

Fortunately, you can get around this by

setting up certain kinds of trusts, such as

a Crummey trust (see page 10) or a minor’s

trust, where the gift will qualify for the

annual exclusion even though the recipient

does not have complete access to the gifted

assets. Please contact us for more details.

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Taxable Estate 2001 2002 Marginal Tax Rate(After Deductions) Tax Tax (Tax on Next Dollar)

$675,000 or less $0 $0 37%*

$750,000 $27,750 $0 39%*

$1 million $125,250 $0 41%

$1.25 million $227,750 $102,500 43%

$1.5 million $335,250 $210,000 45%

$2 million $560,250 $435,000 49%

$2.5 million $805,250 $680,000 53%/50%**

$3 million $1,070,250 $930,000 55%***

* For 2001 only. For 2002, this rate is effectively eliminated by the increase in theestate tax exemption.

** For 2001, 53%, and for 2002, 50%.

*** For 2001, the benefits of the graduated estate and gift tax rates and exemptions are phased out for estates/gifts over $10 million. For 2002, the 55% rate is eliminated, so estate amounts in this bracket are taxed at 50%.

✝ Source: U.S. Internal Revenue Code

Chart 3 ✝

2001 and 2002 Gift and Estate Tax Rates

SELECT THE BEST

PROPERTY TO GIFT

Consider both estate and income tax

consequences and the economic aspects

of any gifts you’d like to make. To minimize

estate taxes, make gifts of property with

the greatest future appreciation potential.

To minimize income taxes, gift property

that hasn’t appreciated significantly since

you’ve owned it. Why? Because your basis

in the property generally carries over to the

recipient, who will owe taxes on any gain

when he or she sells it.

This strategy may be less advantageous

when, with the repeal of the estate tax in

2010, beneficiaries will no longer receive a

step-up in basis to fair market value for

inherited property. Currently, when heirs

sell inherited property, they don’t pay

capital gains tax on appreciation that

occurred before their loved one’s death.

The basis of inherited property is typically

considered the asset’s value on the date of

the loved one’s death. So, it has made sense

to wait to transfer highly appreciated assets

until your death. Even in 2010, this may be a

smart strategy for at least a portion of your

assets because $1.3 million in assets plus

another $3 million for assets going to a

spouse will still receive the step-up.

For property that is expected to decline or

has declined in value, your best bet is to sell

the property to take advantage of the tax

loss. You may then gift the sale proceeds.

BEWARE OF THE GST TAX

The generation-skipping transfer (GST) tax

was designed to limit an individual’s ability

to transfer wealth to successive generations

without incurring a gift or estate tax at each

generation. It is equal to the top estate tax

rate. (See Chart 2 on page 6.)

8

Family limited partnerships (FLPs) can allow you to gift assets while

maintaining control of them. In establishing the partnership, you,

as grantor, become the general partner. As such, you make all

decisions regarding the assets held in the FLP. Thus, even if you

hold only a 1% general partnership interest, you control how the

FLP’s assets are invested and distributed (subject to a fiduciary level

of responsibility). The recipients, generally family members, are

gifted limited partnership interests. Using discounts, you can make

annual gifts that qualify under the annual exclusion. You can fund

the partnership with cash, marketable securities, real estate, corpo-

rate stock (except S corporation stock) or other types of assets.

Wealth Planning Tip 1

CONTROL ASSETS WHILE YOU GIVE THEM AWAY WITH AN FLP

9

Fortunately, there is a GST tax exemption.

Through 2003, the exemption will be

indexed annually for inflation, with the 2002

amount being $1.1 million. But beginning in

2004, it will be equal to the estate tax

exemption. (Also see Chart 2.) Gifts to

skipped generations also qualify for the

$11,000 annual gift tax exclusion under

certain conditions.

When properly used, this GST exemption

allows some degree of long-term wealth

building even when the estate tax is in

effect. But be careful: The GST rules are

complex and call for careful planning.

PLAN WITH TRUSTS

Trusts are effective estate planning tools.

They may be revocable (the grantor

reserves the right to change the terms or

recover the assets at any time) or irrevoca-

ble (the grantor cannot alter the terms

or recover the assets during the trust’s

existence). Using trusts in a gift or estate

plan can provide significant tax savings

while preserving some control over what

happens to the transferred assets. Here’s a

look at some of the most common trusts:

Credit shelter trust. If you are married,

you can use a credit shelter (or bypass)

trust to take advantage of both your and

your spouse’s estate tax exemptions. When

the first spouse dies, assets worth the

available estate tax exemption pass to a

trust, from which the surviving spouse gets

the income for his or her life, plus principal

distributions at the trustee’s discretion.

When the surviving spouse dies, the

remaining principal usually passes to the

children and, because the surviving spouse

did not control the trust, the trust assets

bypass estate tax in the second estate. To

use the trust, each spouse must own assets

individually that he or she can pass into this

trust on death.

QTIP trust. In some circumstances, you may

hesitate to leave property outright to your

spouse, who would then have complete

control over it during life and the ability to

distribute it as he or she wished at death.

A qualified terminable interest property

(QTIP) trust is a viable alternative.

A QTIP trust can

be used to provide

your spouse with

lifetime income

while preserving the

principal for benefi-

ciaries you choose, such as children from a

previous marriage. And if you write the trust

provisions to permit it, the trustee may also

make distributions from the principal for the

surviving spouse’s benefit during the trust

term. You can arrange for a portion of your

assets to be left outright to your spouse,

with another portion left in the trust.

Using trusts in a gift or estate plan can provide

significant tax savings while preserving some control

over what happens to the transferred assets.

QDOT. A qualified domestic trust (QDOT) is

used when the surviving spouse is not a U.S.

citizen. Transfers to a noncitizen spouse

generally do not qualify for the marital

deduction unless property passes to the

surviving spouse in a QDOT. The rules and

requirements for a QDOT are beyond the

scope of this overview. We can help guide

you if your spouse is not a U.S. citizen.

Crummey trust. Normally gifts to trusts do

not qualify for the annual exclusion because

they are not considered to be of a present

interest. But if the beneficiaries have the

right to withdraw the gifted assets during the

tax year, then the gift is considered a present

interest. This is where a Crummey trust can

help. It generally gives beneficiaries the right

to withdraw the assets, on notice, for a

period of time during the tax year, usually for

a 30- to 60-day window. This provides you

with a way to make gifts for the future that

qualify for the annual exclusion.

GRAT and GRUT. Grantor-retained annuity

trusts (GRATs) and grantor-retained uni-

trusts (GRUTs) are irrevocable trusts into

which you place assets and then receive the

income from those assets for a defined num-

ber of years. At the end of the trust term,

the principal passes to the beneficiaries. In a

GRAT, the income you receive is an annuity

based on the value of the assets on the date

the trust is formed. No additional gifts are

allowed to a GRAT. In a GRUT, you retain a

right to receive a percentage of the value of

the property as determined each year.

Assets in these trusts avoid probate, and

their value is frozen for gift and estate tax

purposes. You also maintain some control

because you select the trustee and set the

trust terms. The present value of the income

stream you receive reduces the ultimate

principal that passes to the beneficiaries.

This substantially reduces the value of the

gift when compared with an outright gift

of assets. If you outlive the trust term,

all of the assets (plus appreciation) will

be excluded from your estate, because

you retained no interest in the trust

assets at death.

QPRT. By using a qualified personal

residence trust (QPRT), you can remove

substantial value from your taxable estate.

You gift your home to the QPRT, which then

legally holds the title. You receive the right

to live in the home for a set number of

years. At the end of this period, the

residence is typically distributed from

the trust to your children.

10

At

the time

of the transfer,

you are gifting the

value of the home, less

the value of your right to live

in it for the designated period. A

QPRT is especially effective when real

estate values are depressed and you expect

an upturn in the real estate market. The

primary risk with a QPRT is that if you

die during the trust term, the value of the

home at the time of your death will still be

included in your taxable estate. You can

establish two QPRTs, but one must be for

your principal residence.

TRANSFER BUSINESS OWNERSHIP

If you are a family business owner, you have

additional estate tax saving tools at your

disposal. Transferring business ownership

can preserve your business and accumulated

wealth — if planned properly. Consider

the following:

Family business exclusion. If an active

family business makes up 50% or more of

your gross estate and you meet certain

other requirements, your estate qualifies for

a family-owned business exemption. The

exemption, in combination with the estate

tax exemption, equals $1.3 million. But the

act increases the estate tax exemption

to $1.5 million in 2004, and effectively

eliminates the family-owned business

exemption. (See Chart 2 on page 6.)

Estate tax deferral. Normally, estate taxes

are due within nine months of death. But if

closely held business interests exceed 35% of

the adjusted gross estate, your estate may

qualify for a tax payment deferral. If so, your

estate needs to make interest payments on

only the estate tax owed on the value of the

business until five years after the normal

due date. The tax is then paid on the closely

held business interest over 10 equal annual

installments. Thus, your estate can defer

paying a portion of the tax for up to 14 years

from the original due date. (See Case Study I.)

Section 303 redemption. Your company

can buy back stock from your estate without

the risk of the distribution being treated as

a dividend for income tax purposes. The

distribution is treated as a sale or exchange

of the stock. Because the basis is stepped

up to fair market value, no income tax is

due on the distribution. Generally such a

distribution must not exceed the estate

taxes and funeral and administration

expenses of the estate.

11

SAVING TODAY BY PAYING TOMORROWMarjorie owned a small distribution company that accounted for

50% of her estate. When she died in March 2001, her estate’s total

estate tax liability was $2 million. Half of the liability is due at the

normal due date of her estate’s tax return in December 2001 (nine

months after Marjorie’s death). The other $1 million of liability may

be paid in 10 installments, starting in December 2006 (five years

and nine months after Marjorie’s death), and ending in December

2015. Marjorie’s estate would also have to pay interest on the

unpaid liability each year.

Case Study I

One caveat: The value of your holdings

in the business must exceed 35% of the

value of your adjusted gross estate. If the

redemption qualifies under Section 303,

this is an excellent way to fund payment

of estate taxes.

Buy-sell agreements. Buy-sell agreements

protect owners and their heirs in the event

of death or disability, or at retirement. For

closely held business owners, buy-sell

agreements can also be structured to

minimize estate taxes. If done correctly,

the valuation for the buy-sell agreement

will set the value for estate taxes. Buy-sell

agreements also typically restrict a share-

holder’s ability to transfer shares outside

the current ownership group without the

other owners’ consent.

Valuation discounts. Your business may

be your most valuable asset. But because it

doesn’t trade on the open market, arriving

at an appropriate value for closely held busi-

ness stock can be complex. Shares of closely

held businesses often have a reduced value.

A minority discount is generally available if

you gift less than a 50% business interest to

a recipient. In addition, you may be able to

claim a discount for lack of marketability,

because the partial interest transferred

generally won’t have a ready market and

would be difficult to sell at full value. But

not all discounts are available to donors

after death. Thus, to achieve the largest

discount, consider making gifts during

your lifetime.

GIVING TO CHARITYharitable giving helps you reduce

your estate tax bill while aiding your

favorite organizations. Direct

bequests to charity are fully deductible for

estate tax purposes, as are partial bequests.

Lifetime gifts remove assets — as well as

future appreciation — from your taxable

estate and are deductible on your income

tax return. In addition to tax advantages,

contributing to charity is a good way to leave

a legacy in your community or to instill in

your heirs a sense of social responsibility.

CREATE CHARITABLE TRUSTS

You can leave assets, or income from the

assets, to both charity and family members.

A split-interest trust is often used in this

instance:

CLT. A charitable lead trust (CLT) provides

income to chosen qualified charities during

the term. When the term expires, the principal

goes to the trust’s designated beneficiaries —

often family members. The trust must pay the

annuity at least annually. If you establish the

trust during your lifetime, the amount subject

12

c

to gift tax is reduced by the present value of

the annuity going to charity. You also will be

entitled to a charitable deduction on your

income tax return.

CRT. A charitable remainder trust (CRT)

is basically the reverse of a CLT — the

beneficiaries receive the annuity and the

charities receive what is left when the trust

term expires. You can use a CRT during your

life to retain an income stream and then

pass the principal to charity at your death.

Another benefit: After you make the gift, the

trust can sell the trust assets free of capital

gains tax because the gain is treated as if

realized by a tax-exempt organization. Full

sale proceeds are then available to buy tax-

able income-producing securities. You can

receive an income tax deduction when you

create the CRT based on the present value

of the assets ultimately passing to charity.

For both CLTs and CRTs, the annuity can be

either fixed, based on the initial fair market

value of the trust (an annuity trust — CLAT

or CRAT), or variable, based on the fair

market value of the trust at the beginning

of each year (a unitrust — CLUT or CRUT).

The annuity can be for either a set term or

the life of the donor or donors.

Another option is a gift annuity, which works

similarly to a CRT. You contribute an asset

to a charity that agrees to make annual

payments back to you (and/or another

beneficiary) either for a

specified number of years

or — more typically —

until death. You can take

an income tax deduction

on the value of the

donated amount

minus the present value of

payments back to you or

your family and limited to

30% of your adjusted gross

income. If the charity sells

the asset, neither you nor

the charity must pay

capital gains tax on the

proceeds. But you will

owe some tax when

you receive payments.

13

When you are thinking of contributing to charity, consider

giving from your gallery instead of your investment

portfolio. Gains on collectibles are taxed at a top capital

gains rate of 28% — not the 20% rate that applies to

gains on most long-term property — so you save taxes

at a higher rate. You get a deduction for your gift’s full

market value, subject to certain threshold limitations for

adjusted gross income. The collectibles donated must be

consistent with the charity’s purpose.

Wealth Planning Tip 2

SAVE MORE CAPITAL GAINS TAX BY GIVING COLLECTIBLES TO CHARITY

You can use a CRT during your life

to retain an income stream and then

pass the principal to charity at your death.

FORM A PRIVATE FOUNDATION

OR DONOR-ADVISED FUND

You or your family can form a private

foundation to support your charitable

activities or to make charitable grants

according to your wishes. If the foundation

qualifies for tax-exempt status, your

charitable contributions to it are deductible,

subject to certain limitations.

Deductions for donations of appreciated

capital gain property to a private

nonoperating foundation are limited

to your basis in the property, unless

the property contributed is qualified

appreciated stock. In this case, you can

claim a deduction for the appreciated

value of the stock, not just your basis.

As an alternative to using a private

foundation, consider a donor-advised

fund. This fund is essentially a small-scale

private foundation that requires much less

administration. Generally a large public

charity sponsors the fund, but you make

a contribution that is used to create a pool

of funds you control. Various factors will

determine whether such an arrangement

is appropriate for you.

Although you may have fewer incentives

for creating a foundation or donor-advised

fund in light of the increasing estate tax

exemption (and potential ultimate repeal),

both are still useful options. Please call us

to discuss how a private foundation or

donor-advised fund could fit into your plan.

MAKING THE MOSTOF RETIREMENTACCOUNTS

etirement accounts provide a favorable

way to accumulate significant wealth.

The best known plans are probably

IRAs and 401(k) plans, but others are also

available. If you are self-employed or own

your own business, you may have a Keogh,

profit-sharing or money-purchase plan. (See

Case Study II.) Small employers usually

establish simplified employee pensions

(SEPs) or savings incentive match plans for

employees (SIMPLEs) to contribute toward

both their employees’ and their own retire-

ment. Nonprofit organizations can offer their

employees 403(b) plans.

MAXIMIZE YOUR CONTRIBUTIONS

Usually it is beneficial to contribute as much

as possible to retirement accounts because

of their tremendous tax advantages. First,

14

r

you may be able to deduct IRA contributions,

depending on the type of IRA and your

adjusted gross income (AGI), and other plan

contributions are usually made pre-tax.

Second, and probably more important,

earnings and appreciation on retirement

account funds compound tax-deferred (and

in some cases tax free — see Wealth Planning

Tip 3 on page 16) until you withdraw them.

The power of tax-deferred compounding is

extraordinary and over extended periods

can increase your wealth substantially. And

under EGTRRA, you can put away more

money than ever — especially if you are

age 50 or older. (See Chart 4.)

MINIMIZE THE TAX CONSEQUENCES

OF DISTRIBUTIONS

What are the consequences of distributing

money from your retirement plans? Age,

health and, in some cases, life expectancy

are all factors that can affect your retire-

ment distributions.

Distributions from traditional IRAs and

qualified plans are taxed as ordinary

income. The key to minimizing income taxes

is to take distributions in years you have

lower taxable income and thus will fall into

a lower marginal tax bracket, or years you

15

BUSINESS OWNERS CAN PARLAY RETIREMENTPLANS INTO EVEN BIGGER TAX SAVINGSDavid wants to set up a retirement plan for his business that will

both help him provide an appealing benefit to attract and keep

quality employees and allow him to maximize his own plan

contributions. His business advisor suggests he set up a

profit-sharing plan. Even if David’s company suffers a slow year

and he can’t afford to contribute cash until after year end, that’s

OK. He has until the due date of his return to make contributions

to the plan, as long as he creates the plan before year end. If

David receives a six-month extension, he could have as long as

81/2 months after year end to contribute.

But David doesn’t stop there. To take this strategy to the next

level, he implements a money-purchase pension plan in addition

to the profit-sharing plan. Using both of these plans, he can

contribute and deduct as much as 25% of each employee’s annual

compensation — including his own — up to annual limits.

Case Study II

Traditional401(k)s and 403(b)s And Roth IRAs SIMPLEs

401(k)s For Taxpayers Traditional For Taxpayers For TaxpayersYear And 403(b)s 50 and Over And Roth IRAs 50 and Over SIMPLEs 50 and Over

2001 $10,500 $10,500 $2,000 $2,000 $6,500 $6,500

2002 $11,000 $12,000 $3,000 $3,500 $7,000 $7,500

2003 $12,000 $14,000 $3,000 $3,500 $8,000 $9,000

2004 $13,000 $16,000 $3,000 $3,500 $9,000 $10,500

2005 $14,000 $18,000 $4,000 $4,500 $10,000 $12,000

2006 $15,000 $20,000 $4,000 $5,000 $10,000 $12,500

2007 $15,000 $20,000 $4,000 $5,000 $10,000 $12,500

2008 $15,000 $20,000 $5,000 $6,000 $10,000 $12,500

* Source: U.S. Internal Revenue Code

Chart 4*Retirement Plan Contribution Limit Increases

have extremely high deductible expenses,

such as medical costs or charitable contri-

butions, to offset the distribution income.

AVOID EARLY WITHDRAWALS

Generally, until you reach the age of 591/2,

you can’t withdraw funds from your

retirement plans without paying a 10%

penalty tax. The 10% tax is in addition to

regular income tax. There are, however,

exceptions. For example, the 10% penalty

does not apply to distributions made after

the owner’s death or disability.

Distributions from nondeductible

contributions or that are part of a series of

substantially equal payments over your life

expectancy (or the life expectancy of

you and your beneficiary) also

are not subject to the penalty.

TAKE MINIMUM

DISTRIBUTIONS

You must start

taking minimum

distributions by

April 1 of the year

following the year

you turn age 701/2. This

is known as the required

beginning date (RBD). The starting

point for determining the required minimum

distribution amount for a given year is the

balance as of Dec. 31 of the prior year. For

IRAs, all your accounts must be aggregated

to calculate the minimum distribution,

but you can choose the account(s) from

which to take distributions. More and more

people are withdrawing only the minimum

required amounts to maximize continued

tax-deferred growth.

New regulations, issued early in 2001,

greatly simplified the rules. In fact, everyone

now uses the same tables to calculate the

appropriate amount. The new tables reduce

the required minimum distribution amount

for almost everybody.

16

If your adjusted gross income doesn’t exceed the limits, you

can make a nondeductible contribution (or roll over traditional

IRA funds) to a Roth IRA up to the annual limit in Chart 4

(reduced by contributions to all your other IRAs for the year).

So with no deduction for the contribution, what’s the benefit?

You don’t pay taxes or face the 10% early withdrawal penalty

for qualified distributions. That means you (or your beneficiaries)

pay no income tax — ever — on growth in the account. A

distribution is qualified if the Roth IRA has been open for more

than five years and the distribution is made:

■ On or after you reach age 591/2,

■ To your estate or beneficiary after your death,

■ As a result of you becoming disabled, or

■ For first time homebuyer expenses of up to $10,000.

But perhaps the biggest benefit is that you can continue to

make contributions after you reach age 701/2 — and continue

to reap the benefits of tax-free growth — which you can’t do

with a traditional IRA. And beginning in 2003, EGTRRA allows

you to designate as a Roth contribution all or part of your

contribution to your employer-sponsored retirement plan —

if the plan includes this option. The contribution will be subject

to the same rules as a Roth IRA.

Wealth Planning Tip 3

AVOID TAX ON GROWTH — FOREVER — WITH A ROTH IRA

The new rules apply to distributions

beginning Jan. 1, 2002, though account

holders may use them for certain

distributions in 2001. Qualified deferred

compensation plans, such as 401(k)s, must

be amended to accept the new rules before

you can use them. Review your situation to

determine the best way to proceed.

Be careful when calculating the proper

amount, because failure to withdraw the

minimum amount in any year could result

in a 50% excise tax on the shortfall. This

is particularly important in light of new

reporting rules that require IRA custodians

to report your required minimum

distribution amount to the IRS.

On your death, your surviving spouse

beneficiary may still roll over an IRA into

his or her own IRA. For surviving spouses

who have not yet reached age 701/2, this can

further defer the distribution.

STRETCH OUT DISTRIBUTIONS

WITH FAMILY BENEFICIARIES

Retirement plan assets held at death are

the most heavily taxed assets. With large

accumulations of retirement assets, income

and estate taxes could take close to 75%,

leaving about 25% for your heirs.

One way to help

reduce the income tax bite

on retirement plan assets is to have your

children, as beneficiaries, elect to receive

distributions over their life expectancies

(rather than shortly after your or your

spouse’s death). Thus, income taxes are

payable as distributions are made to the ben-

eficiaries over time, and more is left to grow

tax-deferred. More people are withdrawing

only the minimum required amounts from

inherited retirement accounts to maximize

the period assets can grow tax-deferred.

17

18

DETERMINING YOURINSURANCE NEEDS

i nsurance — whether it’s life, disability,

long-term care, or property and casualty —

ultimately protects your family’s future. But

many people are underinsured. If you fall into

this group, a premature death or disability, a

large property loss, or a lawsuit could cost you

a large chunk of your assets — or even leave

you (or your family) financially devastated. To

fully protect and provide for your family while

minimizing your premiums and the tax conse-

quences, you must carefully

determine your insurance needs

and then obtain the appropriate

coverage from a financially

strong insurance company.

LEVERAGE LIFE

INSURANCE

Life insurance may be

the most powerful type of

insurance because it can

replace income, provide

liquidity to equalize assets

among children active and

inactive in a family business,

or be a vehicle for passing on

leveraged funds free of estate

tax — all in a single package.

And though the estate tax is decreasing and

will be temporarily eliminated in 2010 (see

Chart 2 on page 6), your estate may very

well face at least some tax estate liability.

Insurance can provide liquidity to pay these

estate taxes.

Here are the three key steps you need to

take when purchasing life insurance:

1. Quantify your need. To estimate the

amount of life insurance you need, consider

your current investments and the support

your family will require. Ideally, life insur-

ance should replace most or all of your wage

contribution to the family for a readjustment

period of several years after death. Life

insurance should also cover the cost of

funding children’s education and paying off

mortgages or other debts.

Then look at any liquidity problems your

estate may have. Estates are often cash

poor, and your estate may be composed

primarily of illiquid assets such as closely

held business interests, real estate or

collectibles. If your heirs need cash to pay

estate taxes or for their own support, these

assets can be hard to sell. For that matter,

you may not want these assets sold.

Even if your estate is of substantial value,

you may want to buy insurance simply to

avoid the unnecessary sale of assets to pay

expenses or taxes. Sometimes second-to-die

insurance makes the most sense. Of course,

your situation is unique, so please get pro-

fessional advice before buying life insurance.

2. Choose the right form of

ownership. Choosing the proper

form of ownership is just as

important as selecting your

beneficiaries. If you or your

spouse owns the policy, the

insurance proceeds could be

subject to estate taxes on the

surviving spouse’s death. If your

children own the policy, the

proceeds will not be included

in your estate, and you can use

the annual $11,000 exclusion for

making gifts to them to pay the

annual premiums. But you must

be confident that your children

will actually pay the premiums.

Other possible owners include

an irrevocable life insurance

trust (ILIT — see Case

Study III on page 20), a

family limited partnership

(FLP — see Wealth Planning

Tip 1 on page 8) or limited

liability company (LLC), or

your business.

Generally, to reap maximum tax benefits you

must sacrifice some control and flexibility as

well as some ease and cost of administra-

tion. To choose the best owner, you must

consider why you want the insurance, such

as to replace income, to provide liquidity or

to transfer wealth to your heirs. You must

also determine the importance to you of tax

implications, control, flexibility, and ease

and cost of administration.

19

Even if your estate is of substantial

value, you may want to buy insurance

simply to avoid the unnecessary sale

of assets to pay expenses or taxes.

3. Pick the insurer. In addition to selecting

a financially strong insurance company, you

will need to critically evaluate a company’s

policy illustrations and computerized

printouts showing how your money will

grow. Dividend assumptions, future interest

rates, mortality costs and overhead

expenses all could significantly affect

the amount of your future premiums.

LOOK AT DISABILITY INSURANCE

Long-term disability insurance is one of the

most overlooked areas of wealth planning. It

replaces your wage income, or a major share

of it, if you suffer a disabling accident. Most

people will become disabled for 30 days or

more at some point during their lifetimes.

Although Social Security covers most

employees, its benefits are gener-

ally inadequate for individuals

with a high standard of living.

The definition of disability is

the most important feature of the

policy. You will generally want a

policy with the least restrictive

definition possible. Other crucial

matters include:

• The period you have to waitafter becoming disabledbefore you are eligible forbenefits,

• The length of time the benefits will be paid (to age 65 or for life), and

• The taxability of the benefits, which may beexcludable if you bear thecost of insurance.

The potentially devastating effects of

disability increase if you are a business

owner. To further protect yourself — and

your business — consider overhead insur-

ance and key person insurance as well.

20

IT MAY BE CRUMMEY, BUT AN ILIT OFFERS AN ATTRACTIVE OWNERSHIP ALTERNATIVEJack decides to buy a life insurance policy to benefit his two college-aged

children, Melissa and Ben. He wants to keep the proceeds out of his estate

without giving the policy outright to his children, who are still learning to be

financially responsible. His advisor suggests a widely used form of ownership —

the irrevocable life insurance trust (ILIT). After Jack sets up the trust, he simply

needs to make gifts to it that the trustee can use to pay the premiums. Melissa

and Ben, as beneficiaries, will still receive the proceeds, but the trust will control

how they are paid out.

Jack’s advisor also suggests the trust include a Crummey provision. The resulting

Crummey power allows Jack’s gifts to be free of gift tax under the annual

exclusion. Normally, gifts have to be of a present interest to qualify, and gifts to

a trust are considered to be of a future interest. But by providing the beneficiaries

with the right to withdraw the gifted money within a short, set period, the

Crummey power makes the gifts present interests for gift tax purposes. After

that right lapses, the trust then pays the insurance premiums. Jack does have to

sit down with Melissa and Ben and explain to them that they will benefit more if

they let the right lapse so the gifts can be used for premiums.

Case Study III

Overhead insurance covers expenses

like rent, wages, benefits, loan payments

and taxes. Key person insurance protects

against losses, including decreased sales,

productivity and profits, from the disability

of a key employee. Some key person plans

pay benefits to the business. Others pay

directly to the employee, freeing up the

employee’s salary. Key person premiums

are not tax deductible, but the benefits

are tax-free.

EVALUATE LONG-TERM

CARE INSURANCE

Although hard to face, there’s a good chance

you’ll need some form of long-term care,

and the resulting costs can be one of the

biggest financial threats you face. Left

unchecked, they can easily eat up a

lifetime of built-up wealth.

Recently, long-term care insurance has

become more popular as a way to keep

assets for heirs, rather than use them to

fund nursing home costs. It may provide

daily benefits for home healthcare,

institutional care or both.

Determining a precise combination of

benefit amounts, elimination periods

and inflation riders to meet your

future needs can be challenging.

One way to deal with this decision

is to determine how much of the

long-term care risk you can

reasonably cover and

then transfer the balance

of the risk to an insurer.

DON’T FORGET ABOUT PROPERTY,

CASUALTY AND LIABILITY INSURANCE

Property and casualty insurance provides

coverage for your home and its contents,

your automobiles, and your personal

property. Excess liability coverage,

commonly referred to as umbrella coverage,

kicks in where your other coverage leaves

off. Usually you cannot buy excess liability

coverage unless both your homeowners and

auto coverage meet certain

criteria. If you serve on

corporate or nonprofit

organization boards

of directors, you

should also con-

sider insurance to

cover associated

liability.

21

Split-dollar plans provide for split payment of life insurance

premiums — your business or employer pays a portion and you pay

the other portion. On your death, a portion of the policy proceeds

usually goes to the company to repay the premiums it advanced

over the years. The business’s portion of the premiums becomes

taxable income to you. You can name yourself, your family members

or your estate as the beneficiary. To tie in estate tax savings, you

can use a trust to avoid owning or controlling the policy. You can

also use a split-dollar plan to provide cash to fund a buy-sell

agreement when you die. But beware: The IRS recently issued

Notice 2001-10 that puts the future viability of split-dollar plans in

doubt. Please contact us to address how the issues may affect you.

Wealth Planning Tip 4

CONSIDER A SPLIT-DOLLAR PLAN

REFINING YOURINVESTMENTSTRATEGY

y our ideal investment strategy depends

on your age, portfolio size, risk

tolerance and desired rate of return,

liquidity and cash flow needs, and income tax

bracket. Thus, developing a strategy involves

evaluating these elements and allocating

assets accordingly while considering the tax

consequences. Of course you’ll then need to

stick to your strategy, making refinements

as necessary.

RATE YOUR RISK TOLERANCE

All investments involve a trade-off between

risk and return. A certain amount of risk is

inevitable if you want your money to grow.

Understanding your personal risk tolerance

will help you make investment decisions you

feel comfortable with.

Although your personality influences your

underlying risk tolerance, your stage of life

and current wealth also affect it. As you

move closer to retirement, you may be

better off forgoing the highest potential

returns and putting your money in more

secure investments, such as bonds, because

you would have less time to recover from

a market downturn. But if you have a large

amount of disposable income available for

investing, you may be able to afford more

risk — even under a shorter time frame.

ALLOCATE ASSETS AMONG

THE 3 MAIN CLASSES

Asset allocation is one of the most

important aspects of investment portfolio

management. The objective of any asset

allocation plan is to find the appropriate

mix of expected risk and expected return

to achieve your goals.

Diversifying your funds among the three

broad investment classes — stocks, bonds

and cash — is an important way to help

22

Are you interested in steady growth or bigger opportunities

for gains with more volatility? Do you have a current need for

income? Once you evaluate these and other questions, you

can develop your investment strategy and document it in an

investment policy statement (IPS) based on your risk tolerance,

desired asset allocation and other variables that can affect your

portfolio structure. You can then use your IPS as a working model

for monitoring your portfolio’s structure and performance.

Wealth Planning Tip 5

DOCUMENT YOUR STRATEGY IN AN IPS

minimize your investment risks. The first

step is to decide how to distribute your

resources among the three main classes.

Then within each asset class, you face

additional choices. Here are some of the

options to consider for each class:

Stocks. You can choose among various cate-

gories of stocks, such as by size (large cap,

mid cap and small cap), function (growth,

value, income), geography (domestic,

international) and market sector (technology,

energy, financial services, basic materials) —

each of which may respond differently to

economic changes. Over the short term,

stocks can be a risky investment. But over

the long term, they have earned higher and

more consistently positive returns than any

other financial investment.

Bonds. As with stocks, you can choose

among various categories of bonds, such

as by taxability (taxable, tax free), issuer

(private, federal government, state govern-

ment, municipal government), or time frame

(short, intermediate or long term). Bonds,

though generally less volatile than stocks,

also respond to economic changes. In

particular, bonds are sensitive to market

interest rate changes.

Cash and cash equivalents. These gener-

ally include short-term liquid instruments

such as treasury bills, commercial paper

and money market funds.* This class is

generally allocated the smallest percentage

of resources, because, though you face

minimal risk, you also reap lower rewards.

You may want to maintain sufficient funds

to cover cash needs in an emergency —

perhaps three to six months’ worth.

REMEMBER, TAXES TAKE

A BITE OUT OF RETURNS

Individual investors in the stock and bond

markets anxiously evaluate each investment

with the goal of finding the best returns.

Many factors influence investment choices,

including personal goals, economic activity

and market trends. And though tax conse-

quences should not control investment

decisions, you should recognize them as

an important component of analyzing the

true performance of your portfolio.

The tax rate you pay depends on the type

of income (interest, dividend or capital

gains) you receive. Reviewing after-tax

returns enables you to better evaluate an

investment’s performance relative to its

peers. In fact, many brokers, money

managers and mutual funds* report their

historical performance on an after-tax basis,

which may soon become standard practice.

Because taxes are due as gains are realized,

can a buy-and-hold strategy maximize

after-tax returns? It’s clear that active

management creates turnover, which

ultimately results in tax consequences.

Taxes may increase when gains are realized

or decrease when losses exceed gains.

23

* An investment in a money market or mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation orany other government agency, and that although they seek to preserve the value of an investment at $1 per share, it is possibleto lose money by investing in these funds.

24

Statistics show that the higher the turnover,

the lower the after-tax returns, especially if

turnover occurs within one year and gains

are being taxed at ordinary income rates.

The effect in any particular year may not be

that significant. But

over a number of

years, the com-

pounding can have a

tremendous impact

on a portfolio’s

growth. For example,

the difference

between a $100,000

portfolio growing

after tax at 8% a

year vs. a less tax

efficient $100,000

portfolio of equally

risky investments

growing after tax at

6% a year* amounts

to almost $150,000

over 20 years.

TIME THE RECOGNITION

OF CAPITAL GAINS AND LOSSES

When selling securities and generating

capital gains, you have an opportunity to

greatly impact your tax bill. The top rate

applicable to long-term capital gains is 20%

for most property held more than 12 months

(see Chart 5), while the top rate for regular

income tax is 39.1% for 2001 and 38.6% for

2002. (This rate will continue to decrease

through 2006, when it will remain at 35%.

See Chart 7 on page 29.)

That’s a significant difference. If you can gen-

erate net long-term capital gains instead of

ordinary income, you will save considerably

on your taxes. As a result, investment strate-

gies that emphasize capital appreciation over

TYPE OF GAINS APPLICABLE RATE

Short-term On assets held one year or less, youwill pay your marginal income tax rate.(See Chart 7 on page 29 for reducedrates under EGTRRA.)

Long-term On assets held more than one year,you will pay 20%. (Taxpayers in the10% or 15% bracket pay 10%.)

On assets held On assets acquired after Dec. 31, 2000,more than five years and held for more than five years, you

will pay 18%. (Taxpayers in the 10% or15% bracket pay 8%, regardless of theacquisition date.)

On real estate On real estate held more than 12months attributable to prior deprecia-tion (so-called recapture), you will pay25%.* Any excess (economic) gains willfollow the rules above.

On collectibles On collectibles, such as artwork andcoins, you will pay 28%.*

* Taxpayers in lower brackets pay their marginal rate.

✝ Source: U.S. Internal Revenue Code

Chart 5 ✝

Capital Gains Tax Rates

* These amounts are hypothetical and are used for example only.

25

current income can significantly enhance

after-tax portfolio returns. Of course, tax

considerations are just a factor — if your

investment strategy dictates selling a

short-term security at a gain, don’t let the

taxes stop you. After all, you’ll still net a

significant percentage of your gain.

You can control the amount and timing of

gains or losses recognized and whether the

holding period is short-term or long-term

on a securities sale by identifying which

lots to sell. If you don’t specify, your lots

are considered sold according to first-in,

first-out (FIFO). This could produce the

highest taxable gains if those early lots were

purchased at a price lower than later lots.

For mutual fund shares, you have a choice

of using FIFO, average cost (either single or

double category) or specific identification.

Identifying shares with greater-than-12-month

holding periods will qualify gains for the

lower rates, but may also force you to

swallow larger capital gains if the stock

appreciated steadily while you held it. To

take advantage of specific identification

rules, you must give your broker written

instructions before the sale.

If you have redeemed mutual fund shares

and have had dividends reinvested over

the years, the dividends increase your

cost basis for calculating your gain or loss

on sale or redemption. If you sell certain

business or investment assets that qualify,

consider selling them in installments to

defer capital gains.

CONSIDER YOUR STOCK OPTIONS

Today, more than ever, companies are taking

advantage of the motivational power of

granting stock options as a form of compen-

sation. These options may become a greater

percentage of your income and net worth.

If you hold these options, you should be

aware of the tax implications of receiving

and exercising them and, finally, of selling

the underlying stock. There are two distinct

types of stock options:

Nonqualified options. When nonqualified

options, which are more common, are

granted, they are not included in income

unless the value is readily ascertainable.

For the value to be readily ascertainable, the

option usually needs to be actively traded

on an open market. When you exercise the

option, you recognize ordinary income for

26

the difference between the stock’s

fair market value and exercise

price. (See Case Study IV.)

Incentive stock options (ISOs).

The use of ISOs is limited because

employers receive no compensa-

tion deduction for issuing them

and the stock’s value with respect

to the option is capped in any

year. The employee may exercise

an ISO without recognizing any

taxable income, but there still

may be tax consequences due to alternative

minimum tax calculations. If an ISO meets

certain holding period tests, the sale of the

underlying stock will qualify for long-term

capital gains treatment.

Because the option price must be at least

equal to the fair market value at the date

of the grant, stock option holders often

discover that they are not liquid enough

to exercise the options. So, their options

expire, and they receive nothing. Proper

timing when exercising options is vital.

DON’T FORGET TO DEDUCT

INTEREST EXPENSE

Interest on money borrowed to purchase or

carry portfolio investments (investments

other than passive activity or capital assets

used in an active trade or business) is

deductible only against investment income.

Excess investment interest expense can be

carried forward indefinitely and deducted

against future years’ investment income.

You may elect to treat net capital gains

as investment income and trade off the

taxability of such gains at the lower rate.

This makes sense if you have excess

investment interest expense that will

not be used if you carry it over due

to the lack of investment income in

the next several years. Interest on

funds borrowed to purchase or

carry tax-exempt obligations is

not deductible. For commingled

accounts, allocating the interest

expense against taxable and tax-

exempt securities usually applies.

EXERCISING STOCK OPTIONS IS TAXINGShannon exercises her nonqualified option to buy 1,000

shares of XYZ for $10 per share when the stock is trading

at $30 per share. She recognizes ordinary income of

$20,000 [($30 – $10) x 1,000 shares]. Shannon’s employer

gets a tax deduction for the same amount. Two years

later, if Shannon sells the stock for $35 per share, she will

recognize capital gains income of only $5 per share, or

$5,000, because she already paid tax on the difference

between $30 and $10 per share.

Case Study IV

27

PROTECTING YOUR ASSETS

sset protection planning is the

process of organizing assets to

shield yourself from future adverse

financial circumstances, such as litigation.

An asset protection plan may be as simple as

diversifying your stock portfolio or as complex

as setting up foreign trusts. It is generally

impractical to protect all assets from creditors,

but, by using asset protection planning, your

entire net worth will not be fair game to future

creditors. In addition to the techniques

suggested below, insurance and retirement

plans also can serve as asset protection tools.

TRANSFER ASSETS TO YOUR SPOUSE

With proper planning, a gift to your spouse

can shield the gifted assets from your future

creditors. But if your marriage should end

in divorce, your then ex-spouse would still

own those assets, so you will want to be

confident in the stability of your marriage

before making such a gift.

SET UP AN FLP

Family limited partnerships (FLPs) can also

be used in an asset protection plan. Most

state laws protect the FLP’s assets from

creditors of the limited partners. Generally,

FLPs can be formed without adverse tax

consequences, and limited liability is

provided to the limited partners. (We

discuss FLPs in more detail in Wealth

Planning Tip 1 on page 8.)

ESTABLISH AN OFFSHORE TRUST

The main advantage of an offshore trust

is that a provision in the trust instrument

shields the trust assets from creditors.

Although this provision can also be put into

domestic trusts, it can be “pierced” when

the beneficiary is also the grantor. This is

due to state laws prohibiting grantors from

establishing trusts for their benefit that

block existing and future creditors’ access

to the trust assets. The provision, therefore,

aThe main advantage of an offshore trust

is that a provision in the trust instrument

shields the trust assets from creditors.

28

generally is more effective in foreign trusts.

But this is beginning to change — see

Wealth Planning Tip 6.

Another advantage of the offshore trust is

that the foreign jurisdiction’s trust law gener-

ally applies. These laws typically provide for

a short statute of limitations, and offshore

trust sites typically don’t recognize foreign

judgments. Additionally, foreign jurisdiction

laws generally define benefits that a grantor

may retain without

subjecting the trust

assets to seizure by

creditors. Due to their

beneficial laws and treat-

ment of trusts, some

popular trust sites are

the Cook Islands, the

Cayman Islands and the

Bahamas.

REDUCING INCOME TAXES

s with other aspects of your personal

finances, income taxes can play a

significant role in your ability to

retain and increase your personal wealth.

Therefore, reducing your income taxes is a

logical way to preserve your personal wealth.

It’s important to consider how changes such

as marriage, divorce, the birth of a child, a

promotion, relocation,

retirement, illness or sale

of major assets can easily

alter your taxable income

from year to year. And

thanks to EGTRRA, over the

next several years there will

be even more changes for

you to consider in your

income tax planning.

TAKE ADVANTAGE OF THE

TAX CUTS UNDER EGTRRA

EGTRRA offers a variety of

income tax relief you may

benefit from. Here are two of

the most significant changes that

we haven’t discussed earlier in

this booklet:

Tax rate cuts. Beginning in 2001,

a new 10% tax rate applies to

a portion of income that was

previously taxed at 15%. In

addition, other regular income

tax rates decrease through 2006.

(See Chart 6.)

a

Recently, domestic trusts — specifically Alaska and

Delaware trusts — have been designed to provide the

same benefits that traditionally have been the exclusive

province of offshore trusts. The idea behind these

domestic “offshore” trusts is that you are able to get the

same benefits domestically that used to require you to

go offshore. Presumably, the Alaska and Delaware trusts

will provide the same asset protection benefit as offshore

trusts, but the reality is that they haven’t been tested to

the same degree. Whether an Alaska or Delaware — or

offshore — trust is appropriate for you depends on several

factors. Please contact us to determine whether your

situation warrants such a trust.

Wealth Planning Tip 6

ALASKA AND DELAWARE TRUSTS MAYPROVIDE DOMESTIC ASSET PROTECTION

29

Expanded education tax breaks. Beginning

in 2002, there is a new deduction for qualified

higher education expenses, though adjusted

gross income (AGI) limits apply. Also in 2002,

the maximum Coverdell Education Savings

Account (ESA — formerly Education IRA)

contribution increases from $500 to $2,000,

and funds can also be used for elementary

and secondary school expenses.

The biggest new education tax break may

be the expansion of Section 529 plans, also

effective in 2002. This includes expansion

of the definition to include certain prepaid

tuition programs established and maintained

by private education institutions, and

the exclusion from gross income of

distributions used to pay qualified higher

education expenses.

SHIFT INCOME TO CHILDREN

When you are in a high tax bracket, you may

have opportunities to shift income to family

members who are in lower tax brackets. By

doing this, the family overall will keep more

money after taxes. Among the strategies to

shift income is making annual exclusion gifts

to your children. (For more on the annual

exclusion, turn to page 7.) For children age

14 and older, investment income will be

taxed at their own marginal rate. But for

children under age 14, only a minimal

amount of unearned income will be taxed

at the child’s rate. The excess will be taxed

at your marginal rate.

28% Rate 31% Rate 36% Rate 39.6% RateYear Reduced to Reduced to Reduced to Reduced to

2001 27.5% 30.5% 35.5% 39.1%2002 – 2003 27% 30% 35% 38.6%2004 – 2005 26% 29% 34% 37.6%2006 and after 25% 28% 33% 35%

* Source: U.S. Internal Revenue Code

Chart 6*Regular Income Tax Rate Reductions

30

If you own a business, consider employing

your children. Their salaries will be taxed

at their marginal rates (even if they are

younger than 14, because it’s earned

income), and they can usually make a Roth

or a deductible IRA contribution to defer

taxes and begin a savings program.

Remember, you must pay your children

what you would

pay unrelated

employees to do

the same work

and adhere to

child labor laws.

ACCELERATE OR DEFER

INCOME AND DEDUCTIONS

If you expect to be in a higher tax bracket

next year, accelerating income into the

current year and deferring deductions until

next year could save you taxes overall. If

you expect to be in a lower bracket, the

opposite approach — deferring income

and accelerating deductions — could be

effective. Even if your marginal bracket

remains the same, deferring income to a

later year generally will be advantageous.

And by bunching certain deductible

expenses into one year, you may be able

to exceed the applicable floors.

Also be sure to take all the above-the-line

deductions — the income adjustments that

determine AGI — you are entitled to. Because

AGI determines your eligibility for various

deductions, exemptions and credits, this

strategy can reduce your taxes even further.

BENEFIT FROM HOME OWNERSHIP

Owning a home offers many tax-saving

opportunities. Don’t miss out on any —

be sure to take advantage of all that

apply to you:

Maximize home-related deductions.

You may deduct interest on debt on a first

and second home, though limits do apply.

Although you must include your main

residence as one of the homes, you may

choose any of your other homes as a second

qualified residence, and you may change it

each tax year.

You may be penalized if your withholding and estimated tax

payments don’t meet the minimum required amounts. To avoid

such penalties, during the current year pay 90% of your current

year’s tax liability or 100% of your prior year’s liability. (If your

adjusted gross income exceeds certain levels, you have to pay

a higher percentage — 110% in 2001 and 112% in 2002.) The

second option can be beneficial if you expect your tax to increase,

because you can defer any tax due in excess of last year’s liability

(or 110% or 112% of it) until April 15 of the next year.

Wealth Planning Tip 7

AVOID PENALTIES AND DEFER LIABILITY WITH ESTIMATED TAX PAYMENTS

By bunching certain deductible expenses

into one year, you may be able to

exceed the applicable floors.

31

If you refinance, you must use any excess

principal taken out to substantially improve

the home; otherwise interest on only

$100,000 of such excess debt may be

deductible. Thus, paying down your mort-

gage and tapping into that equity at a later

date could severely

restrict your ability

to deduct the inter-

est as mortgage

interest.

Exclude gain from

the sale of your

home. The Taxpayer

Relief Act of 1997

allows you to

exclude up to

$250,000 ($500,000

if married filing

jointly) of the gain

realized on the sale

or exchange of your

principal residence.

You generally may not use this exclusion

more than once every two years.

If you still incur a taxable gain on your home

sale, examine your records from the last

several years to determine whether you’ve

overlooked any capital improvement

expenses, such as from building additions.

These costs reduce your taxable gain when

added to your basis in the home.

Consider rental rules. If you rent a portion

of any of your homes for less than 15 days,

you need not report the income. If you or a

relative use the home for personal use for

more than 14 days or for more than 10% of

the number of days the property is rented at

fair market value during the year, your claim

for deductions is generally limited to the

gross income from the property.

Converting your

residence from

personal to rental

use may benefit you

if you can sell it

only at a loss. The

loss on such a sale

is not deductible. If,

however, you sell it

after converting it

for rental use, the

loss is deductible

because it is now a

business and not a

personal asset.

Certain additional

rules also apply.

PLAN FOR THE AMT

EGTRRA offers some alternative minimum

tax (AMT) relief from 2001 through 2004,

increasing the AMT exemption by $4,000 for

joint filers and by $2,000 for other filers.

Nevertheless, more and more taxpayers are

likely to be subject to the AMT. If you’re

among them, consider timing receipt of

income and payment of deductible expenses

to minimize liability. And if you paid the

AMT in a past year, you may be able to claim

a credit, depending on which adjustments

generated the AMT.

ou can use many different strategies to manage your wealth. The ones that will work best for you will

depend on your unique situation. To learn how to incorporate these strategies into your personal wealth

plan, fill out the worksheet below. After you complete the checklist, fax or mail it to our office — or simply

call to discuss your needs. We would be glad to help you create a wealth management plan that achieves

your financial goals.

Please check all boxes that apply to your situation.

Do you have a

wealth management plan in place?❑ Yes (date last reviewed: ______________________ )

❑ No, but I would like to develop one

My primary financial goals are:❑ Building and protecting my estate

❑ Charitable giving

❑ Protection against loss/illness

❑ Protecting my investments

❑ Ensuring an adequate retirement income

❑ Minimizing taxes

❑ Transferring my business to my heirs

❑ Other ______________________________________

I would like to learn more about

the following:❑ How the new tax law affects my

wealth management strategies

❑ Using gifting as part of my estate plan

❑ Setting up a trust for my heirs

❑ Transferring ownership of my business

❑ Using trusts to achieve my charitable goals

❑ Setting up a private foundation

❑ Long-term care insurance

❑ Maximizing my retirement income

❑ Planning my retirement plan distributions

❑ Using insurance as part of my estate plan

❑ Choosing the right type of insurance

❑ Split-dollar insurance plans

❑ Creating an asset allocation plan

for my investments

❑ Creating a capital gains strategy

❑ Asset protection planning

❑ Shifting or deferring income

❑ Other ______________________________________

❑ My greatest wealth management concern/need is:

____________________________________________

____________________________________________

____________________________________________

____________________________________________

____________________________________________

____________________________________________

____________________________________________

____________________________________________

____________________________________________

Fax or mail this form to our office for more

information, or call us to discuss your wealth

management needs.

NAME

TITLE

ORGANIZATION

ADDRESS

CITY STATE ZIP

PHONE FAX

E-MAIL

P E R S O N A L W E A L T H M A N A G E M E N T W O R K S H E E T

y

32

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